I have received a lot of phone calls and emails concerning this legislation which, if signed into law, would revive some expired tax breaks including those of particular interest to dentists – and dental suppliers. The outline below summarizes some of these “extenders” but before we get too excited, I think a refresher on Civics 101 is in order.
Before a bill becomes law it goes through a quite a lengthy process. Normally starting in the House of Representatives, a bill is drafted, reviewed by a committee, discussed on the House floor, and then voted on. That is step one which is where the extender package rests at the moment. The bill then goes to the Senate and goes through pretty much the same process as above. I should note that the Senate is in session until the end of the month/year except Christmas day and the 27th & 28th. As a result of the recent mid-term elections, both the House and Senate (Congress) gained a Republican majority with 53/100 seats in the Senate and 244/435 in the House. Can you spell “Lame Duck?” That said, those new Republicans don’t take office until January (114th Congress). While the Senate may support and pass the House bill, they really want a two-year package as opposed to the one-year bill the House voted on. Thus far, none of the (tax) cost of the extender legislation is paid for with other tax increases or spending cuts, a must-have for the president who is otherwise expected to veto the bill.
Now that we have covered the politics, let’s look at depreciation. Assuming no changes for 2014, Section 179 is $25,000 and there is no 50% Bonus Depreciation. Many of my clients have reached the Section 179 limit or will by the end of the year. If a dentist purchases exactly $25,000 of equipment in 2014, and chooses to, she may deduct the full amount under Section 179 or, alternatively, spread the purchase(s) over 5 years. Please note that when a business asset is bought and paid for has no bearing on when it may be depreciated. Depreciation starts when the asset is “placed into service.” So, if you went to ADA and bought (and paid for) a new computer system, but don’t fire it up and start using it live until January, the depreciation starts in 2015. At the same time, if you took delivery of new x-ray equipment shortly after the ADA meeting on a trial basis and, upon deciding to keep it, you pay for it in full ($25,000) on January 1st, 2015, the depreciation starts in 2014. You can take Section 179 in 2014 or depreciate the equipment over 5 years. Say you don’t need the deduction and decide on regular 5-year depreciation. If the radiography equipment was your only purchase for the year (in the 4th quarter after ADA) you are subject to a different depreciation formula than if the equipment was placed into service prior to October 1st. The rule is that if more than 40% of total purchases for the year occur in the 4th quarter, the 1st year depreciation is 5% of the equipment cost. If less than 40% of the purchases occur in the 4th quarter, then the 1st year depreciation amount is 20% of the equipment cost. I would hate to see doctors rush out and spend $100,000 on equipment between now and the end of the year because of this pending legislation hoping for a big write-off. Under current law, if this $100,000 was the total cost of equipment for the year, the depreciation deduction for 2014 would be $28,750 (100,000 – 25,000 for Sec. 179 = 75,000 X 5% = 3,750 + 25,000 = $28,750). There are a lot of other rules and formulas for depreciation but the “placed into service” issue is paramount. If you are going to run a year-end fire drill with your dental supplier, make sure the placed into service rule can be feasibly adhered to. Mechanical, operatory, or other smaller equipment items sitting in the warehouse that can be brought to your practice in the technician’s van and installed between now and year-end is reasonable. Technology equipment that has to be built, tested, shipped, and then installed and tested again, would be a poor choice since the likelihood of placing it into service (using it on patients) by year-end is very low. Personally, I don’t care for fire drills. Especially at year-end. Having talked to many dental supply company sales folks over the years, I can tell you that they hat the fire drills also. The sales are good of course, but I believe the dental suppliers prefer a well thought out plan for practice modernization including equipment and technology that is integrated. Hating fire drills, I prefer this approach as well. Planning ensures a much better outcome from a practice growth and long-term viability standpoint as well as from a tax and financial point of view. So instead of adding stress to your holidays, and those of your dental supplier and CPA, schedule an early 2015 planning meeting with them and map out a long-term plan for your practice.
Enough Civics, Tax, and Preaching. On to the legislation courtesy of Thompson Reuters.
On Dec. 3, the House of Representatives, by a vote of 378 to 46, passed H.R.5771, the “Tax Increase Prevention Act of 2014” (TIPA), a $41.6 billion bill which would generally extend for one year through the end of 2014 a number of tax relief provisions that expired at the end of 2013.
TIPA would extend the following individual provisions through 2014:
- $250 above-the-line deduction for certain expenses of teachers ( Code Sec. 62(a)(2)(D) );
- Exclusion of up to $2 million ($1 million if married filing separately) of discharged principal residence indebtedness from gross income; ( Code Sec. 108(a)(1)(E) );
- Parity for exclusion for employer-provided mass transit and parking benefits ( Code Sec. 132(f)(2) );
- Deduction for mortgage insurance premiums treated as qualified interest ( Code Sec. 163(h)(3)(E) );
- Deduction for state and local sales taxes ( Code Sec. 164(b)(5)(I) ); and
- Above-the-line deduction for qualified tuition and related expenses. ( Code Sec. 222(e) )
- Tax-free distributions for charitable purposes from individual retirement account (IRA) accounts of taxpayers age 70 1/2 or older. ( Code Sec. 408(d)(8)(F) )
TIPA would extend the following business provisions through 2014:
- Research and experimentation credit ( Code Sec. 41 );
- 15-year straight line cost recovery for qualified leasehold property, qualified restaurant property, and qualified retail improvements ( Code Sec. 168(e)(3)(E) );
- 50% bonus depreciation ( Code Sec. 168(k) );
- Increase in expensing limit and in investment based phase-out amount and expanded definition of Section 179 property for certain real property ( Code Sec. 179 );
- Reduction in S corporation recognition period for built-in gains tax ( Code Sec. 1374 );
- Empowerment zone tax incentives ( Code Sec. 1391 );
TIPA would extend the following energy provisions through 2014:
- Credit for non-business energy property ( Code Sec. 25C );
- Credit for construction of energy-efficient new homes ( Code Sec. 45L );
- Incentives for alternative fuel and alternative fuel mixtures. ( Code Sec. 6426 , Code Sec. 6427 )
It will be interesting to see the back and forth on this and whether or not the legislative and executive branches of our government can effect any long-overdue substantive change to the tax code.